Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Companies / Company-results/  Has Infosys got its mojo back?
BackBack

Has Infosys got its mojo back?

Infosys's highest revenue growth in 19 quarters and higher dollar guidance for FY16 lift stock to two-year high

Infosys’s Q1 net profit increased to Rs3,030 crore in the three months ended June from Rs2,890 crore a year earlier. Photo: BloombergPremium
Infosys’s Q1 net profit increased to Rs3,030 crore in the three months ended June from Rs2,890 crore a year earlier. Photo: Bloomberg

Bengaluru: Infosys Ltd reported strong first-quarter results on the back of a pickup in business across sectors, particularly from its US clients, signalling that chief executive officer Vishal Sikka’s efforts to turn around the company may be beginning to bear fruit.

The strong results prompted India’s No. 2 software services exporter to boost its sales growth forecast for the financial year and lifted its stock to the highest level in over two years.

Under Sikka, the 34-year-old company has been embracing new-generation technologies such as automation and artificial intelligence in a bid to regain its past glory and once again become the bellwether of India’s $146 billion information technology (IT) industry.

Since taking the helm in August 2014, the first non-founder CEO of Infosys has been urging its employees to adopt the user-centric approach of problem-solving called design thinking. And a team of senior executives, led by Sikka himself, has been overseeing 15 of Infosys’s largest clients.

The changes seem to be helping Infosys get more business from existing clients as well as win new contracts. For instance, for the first time in five years, the 10 biggest clients of Infosys outsourced more work to the company.

“We are still early in our journey towards the next-generation services company," Sikka said on Tuesday. “However, this quarter gives us something to smile about and (be) confident of our future."

The company’s shares closed up 11.05% to 1,112.65 on the BSE on a day the benchmark Sensex fell 0.84% to 28,182.14 points.

Infosys retained its constant currency revenue growth guidance at 10-12% for the current financial year but raised its growth guidance in US dollar terms to 7.2-9.2% from 6.2-8.2%, as it believes it will benefit from cross-currency movements.

In the first quarter ended June, Infosys’ revenue in rupee terms rose 12.4% to 14,354 crore from the year-ago period. Its dollar revenue beat expectations by rising 5.7% year-on-year and 4.5% sequentially to $2.26 billion.

The firm’s 7% sequential growth in revenue in rupee terms during the first quarter was the highest in 15 quarters even as its volume growth at 5.4% quarter-on-quarter was the highest in 19 quarters.

Net profit increased 5% from a year ago to 3,030 crore in the three months ended June, matching the median of estimates in a Bloomberg survey of analysts. In dollar terms, net profit declined 4.5% sequentially to $476 million.

The survey had forecast sales of 14,070 crore.

Infosys’s larger rival Tata Consultancy Services Ltd reported a 3.5% sequential growth in revenue in US dollar terms earlier this month, the slowest start to a fiscal year for the company in four years.

Infosys’s growth was led by a 5.1% improvement in the US, which accounts for more than 60% of the company’s total revenue. Revenue growth in Europe, which brings in about one-fourth of revenue, improved 1.2% in the April-June period. The banking, financial services and insurance sector, which accounts for 33% of the company’s revenue, grew 2.8% over the three-month period, even as business from manufacturing clients saw a 5.4% improvement.

“The bigger contributor is operational excellence," Sikka said. “(In) every quarter, the contribution of new initiatives should get bigger, and that will certainly help us get to that goal (of becoming a $20 billion company by 2020)."

The strong results prompted some analysts to change their outlook on the company.

“Infosys’s strong first-quarter revenue washes away the blues of its dismal fourth-quarter drop and sets it up for a strong fiscal year 2016," Ankur Rudra, analyst at brokerage CLSA, said in a note to clients.

“Largest customer reacceleration is a significant positive and indicates Infosys regaining mindshare and market share," Rudra added.

Still, some worried if Infosys was sacrificing its profitability to generate additional business. To be sure, Infosys’s profitability took a hit in the April-June period as operating margins declined by 115 basis points over the year-ago period to 24.9%. A basis point is one-hundredth of a percentage point.

“Any successful turnaround can happen only if the company can either increase its market share or improve its profitability. One cannot make a turnaround without giving away one. Infosys seems to be taking the route of increasing topline even as the margins come under pressure," said a Singapore-based analyst working at a foreign brokerage who did not wish to be identified.

Infosys and other home-grown IT firms also have a few challenges. Business from energy and telecom clients continues to be a cause of concern. For Infosys, insurance was another business that lagged other industry units.

“We reiterate our view that Infosys’s road to recovery will be a bumpy one. Infosys has not only the challenge to put its own house in order but has to deal with the secular and highly disruptive journey into the As-a-Service Economy," said Thomas Reuner, managing director of IT outsourcing research at HfS Research.

“Financial markets take a short-term view, but Vishal and his team have to transition the company to be fit for this disruptive journey—they will only achieve that with a long-term strategic plan. The vision Infosys has announced is strategically sound, but the crux lies in execution and change management."

Sikka expects his company to post better numbers in coming months, unless some macroeconomic factors spoil the party.

“The initiatives we have started from the beginning of my journey here have been producing results in small but measurable ways in the eleven months. The result is combination of realignment of organization we brought in and deep innovative strategic initiatives. But there is clearly a sense that strategic initiatives are starting to pay off and it should continue," Sikka said.

Infosys’s attrition rate saw a marginal uptick to 19.2% from 18.9% at the end of March even as the company added 79 clients in the three-month period to take the total number of active clients to 987.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

ABOUT THE AUTHOR
Varun Sood
Varun Sood is a business journalist writing on corporate affairs for the last fifteen years. He also writes a weekly newsletter, TWICH+ on the largest technology services companies. He is based in Bangalore. Varun's first book, Azim Premji: The Man Beyond the Billions, was brought out by HarperCollins in October 2020.
Catch all the Corporate news and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Published: 21 Jul 2015, 09:26 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App

Chat with MintGenie